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Internet Killed the Newspaper Star

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As most of us know, newspapers are dying. The Internet quickly supplanted "old media" and relegated most newspaper companies to life support. Although this was a gradual process, it seems all but a foregone conclusion (paper) newspapers will go the way the dodo.

This view places me squarely against traditional value investors such as Warren Buffett. Buffett always favored companies with large economic moats. Historically, one prime example was newspapers, which were said to possess mini-monopolies as the "only game in town." However, like so many stocks (e.g. telecoms, retail) this assumption proved to be wishful thinking.

So let's look at a few newspaper companies. One stock favored by Buffett is the Washington Post. Newspapers historically represented a solid investment; however, ubiquitous Internet competition makes for a challenging road ahead, and companies must digitize their content to remain relevant. Yet despite recent developments, Buffett decided in 2012 to double down on traditional wisdom and purchase Media General. Obviously, his positions continue Buffett's long-term "buy and hold" philosophy of purchasing undervalued stocks or "value investing." In other words, while Wall Street is selling, he's buying.

What motivates Buffett's spending spree? Buffett in his most recent Berkshire Hathaway Shareholder letter states he strategically made his newspaper purchases based on "market gaps." That is, Internet media tends to ignore smaller metropolitan areas and hence the strategic advantage for his (recent) acquisitions. According to Buffett, "there is no substitute for a local newspaper that is doing its job." Yet there's little doubt newspapers are still in trouble. And while I don't pretend to know everything the future may hold for these investments, common sense dictates we look other places for more promising opportunities. One of these are domain name providers (e.g. VeriSign), the backbone of web searches as well as technology infrastructure companies (e.g. IBM, Cisco), which help facilitate "born digital" document publication via the Internet and data pipelines.

Like newspapers of old, IBM (NYSE: IBM) and Cisco (NASDAQ: CSCO) two leading network providers, arguably possess economic moats. What do these two companies have in common? Economies of scale, they can bury smaller competitors by the sheer size and scope of their operations. IBM currently weighs in at $237.1 billion, Cisco lists at $114.3 billion. Similarly, VeriSign (NASDAQ: VRSN) has a commanding lead in domain name registry. These companies lack of direct and immediate competition should make a compelling case to investor’s raw metrics aside why they merit further consideration.

In sum, newspaper companies once represented good investments, but market disintegration and technology advances mitigated their monopoly power in relevant markets. As symptomatic of this larger trend many media companies have either been diminished or put out of business entirely. These developments leave the publication ball squarely in IT companies court and only the most quick and nimble will survive. Corporate juggernauts such as IBM and Cisco, and VeriSign currently stand best positioned to both take advantage of recent market trends and extend their economic moats in relevant markets. By understanding emerging technology and its role in "new media," investors will go a long way towards tapping previously unknown opportunities in the "new media" industry.

Pay Close Attention

Analyzing media companies is complicated. There are many factors to consider prior to and during investment. Should one decide to invest, investors should keep a close eye on recent and ongoing developments in the "new media" landscape. By doing so, stockholders create a "margin of safety," which is traditionally not the case with the majority of technology companies. And while no stock is a sure thing, each one has its advantages and disadvantages, by utilizing a well-thought strategic investment strategy, investors can go a long way toward differentiating themselves from the crowd.

David Mercer has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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